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Taking a Cue From Corporates on How to Safeguard and Future-Fit our Retirement Funds

It has been a while since the King IV Report on Corporate Governance for South Africa (King IV)™ was published in 2016.

It has been a while since the King IV Report on Corporate Governance for South Africa (King IV)™ was published in 2016. It was the first of the King reports to include a bespoke supplement for retirement funds, emphasizing the role retirement funds can play in the overall corporate governance ecosystem and the creation of value.

The recent South African Reserve Bank report on the characteristics of the South African retirement fund industry reinforced the importance of private retirement funds in the financial market. These funds can enable household wealth and is therefore critical in ensuring a well-functioning system. According to the report, South Africa’s retirement fund industry holds assets of more than R4.6 trillion, also comprising a material portion of the JSE Limited.

There are several building blocks necessary for ensuring a well-functioning system, many of which focus on the critical role of retirement fund boards of trustees as fiduciaries and stewards.

In trying to look beyond the obvious building blocks like the investment component, it is educational to consider factors that could lead to the system or retirement fund no longer functioning well or the retirement fund becoming unsustainable.

In its 2004 paper on retirement reform, the National Treasury (NT paper) suggested that although retirement fund failures do not occur often, when they do, the consequences can be disastrous. It suggested that regardless of the cause, in almost all instances there is an underlying failure to exercise appropriate and sufficiently rigorous standards of fund governance.

As the NT paper suggested, there are not many examples of catastrophic fund failures. However, avoiding catastrophic failure should not be the primary hurdle. There is an enormous range between catastrophic failure or curatorship on the one side and best-in-class or future-fit and resilient retirement funds on the other.

Let’s consider the example of the Private Security Sector Provident Fund (PSSPF), investigated due to allegations of corruption and maladministration in their processes. According to Moonstone, after an investigation into the PSSPF which lasted three years, the FSCA concluded that the trustees:

  • Failed to take all reasonable steps to ensure that the interests of members, in terms of section 7C of the Pension Funds Act 24 of 1956 (PFA), were always protected.
  • Failed in their fiduciary duty of acting with due care, diligence and in good faith, by not ensuring the procurement of service providers was done in a cost-effective manner.
  • Failed to ensure that the resources of the PSSPF were used in a sound and cost-effective manner, which was a breach of the board’s duties in terms of the PFA and the Financial Institutions (Protection of Funds) Act 28 of 2001.

 

This example, albeit not catastrophic, is similar in tone to many of the highly publicised corporate failures we regularly see, likely steering us to infer that most root causes for failures relate to fraud, non-compliance, or financial mismanagement.

So yes, in learning from these types of failures (both corporate and retirement fund examples), we recognise that a well-governed, compliant, and responsible retirement fund is the ticket to the game, with the VIP access stamp arguably the extent of application of the King IV principles, CRISA and other best practices.

But other than catastrophic or fairly large-scale failures, what could failure look like on a continuum and what may be causing these failures? Considering the lack of retirement fund-focused research on this topic, it is instructive to consider corporate failures.

Booz and Company (now PwC Strategy&) analysed 2 500 companies, assessing the causes for the 17% identified as having failed over the prior decade.  In this case, failure was defined as lagging the industry by more than 20% (thus not catastrophic, but definitely meaningful).  Contrary to what we see in or infer from the catastrophic failure space, in this case the research found that more than 80% of the failures were in fact the result of strategic blunders, rather than large-scale fraud or mismanagement.

What could be viewed as potential strategic blunders in the context of a retirement fund:

  • Not being aware of megatrends driving global change, like climate change, the impact of technology, artificial intelligence and ever-increasing life expectancy.
  • Not giving adequate attention to ESG and sustainability: according to Forbes (The top 10 reasons why businesses will fail over the next 10 years, Bernard Marr, 29 August 2022) one of the top three reasons businesses will fail over the next 10 years is not prioritising sustainability.
  • Not adequately understanding and adapting to the impacts of new ways and styles of working and a gig economy.
  • Not recognising and responding to the evolution in generational values resulting in changes in member expectations and needs over time.
  • Inadequate consideration of transformation imperatives, including Broad-Based Black Economic Empowerment objectives and requirements.
  • Not embracing or giving heed to the board of trustees’ social purpose, suggested in the NT paper as forming part of trustee duties.

 

We know regulation always lags change, but it is likely that in the medium term, some of the items reflected as potential strategic blunders could convert into governance and compliance failures as several are likely to be more explicitly incorporated into our regulatory frameworks.

South Africa was one of the first countries to require ESG factors to be taken into consideration by retirement fund trustees in their investment decisions. However, within the broad language of Regulation 28 there is significant room for varied application and several global developments have since leapfrogged.  As an example, Australian trustees have been held accountable for breaching their fiduciary duties due to inadequate management and disclosure of climate change risks.

As a trustee, are you well equipped and positioned to future-proof the retirement fund you serve: not only against failures, but by proactively ensuring it is resilient and able to sustain an uncertain and exponentially changing future?

 

Your retirement fund’s future is not yet determined – it’s in your hands. Can you handle it?

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